Business Finance Available In India
Do you know almost 90% of the businesses fail in India in the first year of their operation? Shortage of funds is one of the prime reasons because money is the bloodline of any transaction, and raising business finance in India is one of the significant factors in the success of any business.
Mr. X owns a bakery for three years. The top quality and reasonable price of the items in his bakery have made his shop very popular.
The success of his bakery motivated Mr. X to open a chain of similar bakeries at various locations in his city.
However, the available money from his personal Investments and savings is not adequate to satisfy the requirements of his business expansion goal.
His friend, who owns another bakery, offers to be in a partnership with him. Mr. X realized that by entering into the partnership, he could have the required funds, but he would also have to share the profits, decision making, and control of the business.
Mr. X could not decide, he wants to know other options to raise the required funds.
So, he went to a Financial consultant, who recommends him some other means to generate funds for his business as he can apply for a bank loan, or he can issue shares. But, business loans are available only to a legal company.
Mr. X can also get funding by applying for different government schemes that promote entrepreneurship. He can also try to pitch his business idea to the Angel investors or Venture capitalists.
The financial consultant told him that each of the means that generates funding for business has its own benefits and shortcomings.
The final decision should be based on factors like the size of the business, risks involved, purpose, and duration for which funds are needed.
We’ll look in detail what are the options available to Mr. X so he could create a business system he always wanted.
What is Business Finance?
Business finance refers to the funds that are required by businesses to build and run their enterprises as well as other business activities.
It’s almost impracticable for a business to function without an adequate amount of funds.
Funds are required for undertaking various activities such as
1. purchasing fixed assets (fixed capital requirement), which may be-
a. Tangible like machinery, furniture, vehicle, buildings, offices
b. Intangible such as trademarks, patents, copyright, etc.
2. For managing day-to-day operations (working capital requirement),
3. Growth and expansion plans
The funding is needed to establish a business, to run it to modernize it to expand or diversify it.
Business finance can be classified into three principal bases:
- Period (long, medium and short term),
- Ownership (owner’s funds and borrowed funds),
- Source (internal and external).
Long Term: Finance for more than 5 years
Medium Term: Finance for more than 1 year but less than 5 years
Short Term: Finance for not more than 1 year
Owner’s Fund: Business financing by the owners of an enterprise.
Borrowed Fund: Business finance from people or organizations.
Source of generation
Internal Sources: Finance that is done through the business itself, for example, business profit.
External Sources: Finance from outside the business, such as suppliers, banks, and investors
Sources of business finance in India
A business can raise funds in India through various sources.
All the source mentioned below has its individual characteristics.
It’s necessary to study each finance sources properly to identify the appropriate source of raising funds for a particular business.
Remember, none of the below sources are entirely perfect. The business owner must take his current position of the business, purpose, period, and associated risks into consideration while deciding.
A brief description of various sources is given below:
Business owners need to finance their business activities with their personal money like savings or investments.
Mainly when a business is a sole proprietorship because they entirely depend financially on their owner’s assets.
Also, point to be noted here is that when starting a business or expanding a business, your first investor should be yourself either through cash or with collateral on your assets.
Because this will prove to other investors like your friends and family and other financiers that you are in for the long haul into your project and that you are ready to take necessary risks.
Crowdfunding is a pooling of funds for a project or business venture from a large number of individuals (a crowd) typically through an Internet platform.
Crowdfunding help in generating funds through vast networks of people through social media and crowdfunding websites and bring investors and entrepreneurs together.
It has, over the years, increased the scope of entrepreneurship by expanding the pool of investors beyond the owners, friends and families, banks, and venture capitalists.
In this Internet age, crowdfunding can be a great source of funding for a business. Crowdfunding is when several people that are impressed and interested in your idea, product, or service create a fund for your business.
Previously, only nonprofits organizations use crowdfunding to gather donations, but now today, online crowdfunding platforms like Kickstarter, Ketto, Milaap help businesses in generating financial backing for a variety of projects.
Types of Crowdfunding:
Reward-based crowdfunding – When people make a small investment and get rewards like free service or sample products.
Equity-based crowdfunding – Here investor gets a small percentage of shares of the business in exchange for his investment.
Debt-based crowdfunding – People invest their money for interest.
Some crowdfunding platforms in India:
5. Rang De
The Indian government knows that to accomplish the Prime Minister’s dream of India becoming a 5 trillion dollar economy, they have to give a push to the MSMEs.
So the central government, as well as various state governments, have started supporting MSMEs through various business finance schemes in India.
The medium to small-scale Indian businesses will act as the pillar of our economy’s growth by supporting employment and economic development in India. To boost its business, the government of India offers various loans.
These loans are availed by businesses to:
1. Fund their working capital (day-to-day operations)
2. Fund fixed capital requirements
Some government schemes for loans for businesses in India are:
1. Pradhan Mantri Mudra Yojana
2. The Credit Guarantee Fund Scheme
3. Stand-Up India Scheme
4. Small Business Loans in 59 Minutes
5. Credit Link Capital Subsidy Scheme For Technology Upgradation
6. National Small Industries Corporation Subsidy
7. SIDBI Make in India Soft Loan Fund for MSMEs (SMILE)
8. Sustainable Finance Scheme
9. Coir Udyami Yojana
Angel Investors are the professional investors who are generally wealthy individuals or retired company executives.
They invest their money and time directly in small firms and work for the growth of those innovative companies by mentoring entrepreneurs and helping them learn the ropes.
In exchange for risking their money, they ask for the right to supervise the company’s management practices, which often involves a seat on the board of directors and an assurance of transparency.
There are many angel investors in India, they are mostly affluent businessmen or corporate leaders.
They usually keep a low profile and invest in niche areas, and the best place to meet them is at networking events and pitch sessions.
Angel investors with experience and interest in your industry can be a massive bonus for your business. The reason being, not only they can provide you the valuable mentorship, but their network can also help you market your business.
Angel Investors usually want to see:
1. Experience and track record of the business owner
2. Viability of the business plan
3. Business scalability
4. Innovation and creativity
5. An exit strategy
Venture Capitalists (VCs) are on the lookout for businesses that are doing well but have high growth potential, top-performing management teams, and low leverage position.
The venture capitalists usually provide capital to technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications, and biotechnology. They typically come in at a later stage of business growth.
When VCs invest their money, they expect a sound return on their investment. When the shares are sold to the public, apart from the owner, the VCs usually gets the lion’s share on the sale.
To catch a VCs interested in your business, you will need to have:
1. A strong business model
2. Your business must have scalability and sustainability
3. Sales records
4. Loyal customers
One must also make sure to look for investors with proper experience and knowledge about your business, after all, he’ll be involved in the decision making process of your business.
The bank loan is the most common source of business finance in India when it comes to small and medium-sized businesses.
It’s important to understand that different banks offer different advantages, whether it’s personalized service or customized repayment.
It’s a good idea to get every detail from all the relevant banks. After that, decide on the bank that meets your particular demands.
Usually, bankers look for businesses with a stable track record;
When you apply for a business loan, a good idea is not enough; it must be backed up with a solid, scalable, and sustainable business plan.
They also look at the credit score of the business, and the owners and startup.
Business Plan Competitions
In India, you may not have an opportunity to pitch your business idea on platforms like the American tv show Shark Tank, but you must keep looking for business competitions.
These types of competitions can present you with a window of opportunity to get heard by the people who may be willing to invest in your business if they find the idea intriguing.
Various management institutions and government organizations organize these competitions and hackathons across the country.
You can also get some media coverage if you win the competition. But the project must stand out to improve your chances of winning these contests.
The business plan should cover all crucial aspects to convince the investors that your idea is worth investing in.
Choosing the Best Financing Option for Your Business
Now that you’ve read about a wide variety of options available for business finance in India, it’s critical that you carefully consider the advantages and limitations of each option before proceeding.
A thorough understanding of your business plan, and your business goals, the task of finding the right funding source, won’t be as intimidating as you might think.
A plethora of funding options available in India, all you need is a vision, a reliable team, a solid business plan, and the right financing source to build a successful business system.